Edlie Accessories (EA) makes travel bags, both for sale under their own label (“Branded”) and for other resellers to put their label on the bags (“Private-Label”). The bags sold through the two channels are similar, but they differ slightly in the quality of materials and detail in the manufacturing process.

The manufacturing plant at EA has two departments. Department A-101 was the original manufacturing facility, and many of the machines are original. Department A-102 is new, with state-of-the-art equipment. The new equipment facilitates the additional care taken with the Branded product.

The following information presents financial results for the two models from last year:

The product costing system at EA allocates manufacturing overhead on the basis of direct labor costs.

Required

a. Compute the profit for each product using plantwide allocation.

b. Compute the profit for each product using department allocation.

c. Based on the information in the exercise, would you recommend that EA continue using plantwide allocation or switch to department allocation? Explain.

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Sales revenue Direct material.. Direct labor... Manufacturing overhead Department A-101 Department A-102 Total overhead Private Label Branded $768,000 $480,000 156,000 96,000 216,000 144,000 Total $1,248,000 372,000 240,000 $201,600 230,400 $432,000